The year was 1815 and the financier Nathan Mayer Rothschild had seen it before. He knew exactly how the markets would react, now another battle in the Napoleonic wars was getting closer.
With the use of the most highly advanced communication technologies of the times - stagecoaches , semaphores and pigeons - he earned enormous amounts of money from its headquarters in London from speculating in the war, and his investment advice to other investors sounded calculating, cynical:
"Buy when the cannons thunder - sell when the trumpets sound".
So investors can make money on the war. The armed conflict outbreak is an opportunity to buy, this should be exploited as to sell and take profit when the battle is called off.
Rothschild's advice has since been fixed equipment in investors' arsenal of investment-mottoes. Not just because investors have a weakness for that kind of battle lines and generally do not have ethics as part of their market strategy considerations, but also because the answer has proved its worth in dollars and cents.
For there is something to it when you look at the courses fluctuations around armed conflicts in which the stock market have a strong tendency to fall when arms and armies are being mobilized and building up to open warfare , while the markets subsequently very often increases after the first shot is fired.
With the development in the markets this week it’s regretful to note that the Rothschild's investment advice has come up in time with Russian soldiers on the Crimean peninsula. This has led to large swings in the markets, not only in Kiev and in Moscow, but throughout the world.
There has been made lots of research that examines the effects of war on the stock markets, and many reach the same conclusion: War causes the shares to rise, and it's hard to explain why, for what is good about the war?
In the fall analysts from Deutsche Bank did a study of the financial phenomenon in 12 conflicts in the last 30 years - from Reagan's missile attack on Gaddafi's Libya in 1986, of Yugoslavia, Iraq and Afghanistan, the air operation against the same Gaddafi in 2011. In all cases, they observed a decline in share prices in the run-up to the war action, and an increase after the fighting began.
What Nathan Mayer Rothschild was aware of, is still clearly legible in market data. But the explanations are cloudy. In such an extent that economists at the University of Zurich have dubbed the financial phenomenon “the war puzzle”.
Increased likelihood of war get the shares to fall, but eventually the outbreak of war gets prices to rise. This is not easy to get to hang with the basic idea that stock prices reflect expectations about future economic development.
The puzzle solving, which researchers lean towards, is that investors abhor uncertainty more than anything else. Yes, actually detest the uncertainty over war. As security for the war is preferable to a situation of uncertainty about a possible war. And the safety of war causes them to trade prices up. However, more confident scientists are not on their own conclusion than that it leaves open whether this is the real explanation.
It cannot be claimed that it is possible here to solve the war mystery of the stock market, but can only be said that the way of the market may be mysterious, and seems very intricate in this regard.
Rothschild's investment advice has had 200 years to penetrate the investors, and perhaps it may be that it has gone further in than you would think. So much that it has become a self-fulfilling prophecy. The advice has been a rule that financial people follow without anyone completely stop and ask themselves about the good reason for it.
Do you have to buy stock when there is war? Are you consulting Rothschild, it be a “yes”.
But maybe it is worth considering to switch guidelines that after all are a few years old.
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